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Accounts Receivable Turnover Ratio

Accounts Receivable AR Turnover Ratio Assignment / Homework Help
In case firm sells goods on credit, the realization of sales revenue is delayed and the receivables are created. The cash is realized from these receivables later on. The speed with which these receivables are collected affects the liquidity position of the firm. The turnover ratios give the speed of conversion of receivables into cash. The accounts receivable turnover ratio throws light on the collection and credit policies of the firm. The ratio is also referred to as the Debtors Turnover ratio. It is computed as:

                    Sales                   
Average Accounts Receivable

The average accounts receivable is obtained by adding the beginning receivables of the period and the ending receivables, and dividing the sum by two. The sales figure in the numerator is only credit sales, because firm cash sales donít give any receivables. As the companyís profit and loss account does not distinguish between credit and cash sales, total sales are considered for computing this ratio assuming that a very negligible portion of total sales is for cash.

Higher the receivables turnover ratio, greater is the liquidity of the firm. However, care should be taken to see that to project higher receivables turnover ratio, the firm does follow a strict credit policy. This may have an impact on the overall sales of the company. Turnover ratio gives, how many times on an average the receivables are generated and collected during the year.

Example:
 Year 2009   Year 2008 
Turnover $2,654,900 $2,086,450
Receivables $ 769,879 $ 567,632

Accounts receivable turnover ratio:

            $2,654,900            
($769,879 + $567,632) / 2

$2,654,900
 $ 668,755

3.97 times

Average Collection period = Average Debtors x 365 ( in days)
    Credit Sales


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